First and foremost, I hope everyone had a safe and enjoyable holiday. I can’t believe we are now in 2023.
2022 was a tumultuous year for global capital markets. A war in Ukraine, supply shortages, and inflation running at rates we have not seen since the mid-80’s, all weighed on the markets. Almost every asset class, apart from energy, suffered losses. Both bond and stock markets came under pressure as the Federal Reserve raised overnight rates over 400 basis points in an attempt to combat escalating inflation that was supposedly “transitory”.
The current overnight rate is 4.125%. There is also an additional 75 basis points of hikes priced into 2023. To highlight how significant the rate moves were, this time last year the market was pricing in the overnight rate to be .75% by the end of 2022, peaking at 1.35% in mid-2023.
These unprecedented rate increases created turmoil in almost every market. Fixed rate bonds and interest rate sensitive stocks were impacted the most. Vanguard’s Long Term US Treasury bond index and the Nasdaq 100 index both ended the year down over 30%.
As referenced in our prior newsletters, higher interest rates have a far greater impact on companies with higher debt loads, as well as growth stocks. The chart below highlights the return disparity as value stocks significantly outperformed growth.
Stocks closed out the year with another weak month of returns as major domestic equity indexes closed down between 3% and 9% for the month. The Nasdaq 100, which has as higher weighting to a select mega-cap group and growth stocks, closed the year down only a couple of percentage points from its yearly low.
The charts below highlight domestic major stock indexes and their corresponding changes. The second chart illustrates sector performance ranking for 2022.
These charts reinforce our investment philosophy. A well-diversified portfolio that is consistently rebalanced is an appropriate course for long-term capital appreciation.
The graph below shows YTD returns for some of the largest stock markets around the world.
Crude Oil closed the year up only 3% after reaching its peak in March at almost $124 a barrel. Natural gas prices closed the year up 20%, dropping sharply after a mid-year increase of over 250% in mid-August. This cost will surely be passed along to consumers. You can see by the graph below natural gas still accounts for the majority of our electrical generation in the US.
As we look forward to 2023, we see opportunity. Bonds rates have risen to 15-year highs creating alternatives in fixed income assets. Price/Earnings ratios have come more in line with historical averages. As an example, the current P/E of the S&P 500 is 19.88. The prior 30-year average is about 23.
As we mentioned last year at this time, we are still concerned that traditional interest rate hikes will not be the cure to inflation in the United States. Higher energy prices and government stimulus add to inflationary pressure but are not interest rate driven. The difference year on year is the compensation for inflation built into the market. The Federal Reserve has done the heavy lifting with rate increases which have had a significant impact on both bond and stock prices this year. Rate hikes take some time before their full impact is felt in the market. CPI has fallen from close to 10% in the summer to 7% at year-end. Most economists feel CPI will continue to trend lower in 2023 which will allow the Federal Reserve to halt the rate increases. Indeed, the market anticipates a final rate increase in mid next year and a gradual reduction in rates by year-end.
As we go into 2023, we continue to look for increased volatility in both bond and stock markets. Market volatility is common, and it is our responsibility as advisors to navigate our clients during these turbulent times.
When we invest for our clients, we are long-term investors, not traders. It is important not alter long-term plans and become active traders to time markets. We feel the key to long term success is a balanced portfolio that is rebalanced over time to ensure proper risk allocation. We are monitoring the global markets and asset performance.
Each client’s risk tolerance and long-term objectives are different, and we are committed to the achievement of our clients’ long-term goals.
As always if you have any questions feel free to reach out.
This material contains the current opinions of the author but not necessarily those of The Guardian Life Insurance Company (Guardian), New York, NY or its subsidiaries and such opinions are subject to change without notice.
This material is intended for general public use and is for educational purposes only. By providing this content, Park Avenue Securities LLC is not undertaking to provide any recommendations or investment advice regarding any specific account type, service, investment strategy or product to any specific individual or situation, or to otherwise act in any fiduciary or other capacity. Please contact a financial professional for guidance and information that is specific to your individual situation. Russell 2000 Index measures the performance of the smallest 2,000 companies in the Russell 3000 Index of the 3,000 largest U.S. companies in terms of market capitalization. The Hang Seng Index is a free float-adjusted market-capitalization-weighted stock-market index in Hong Kong. S&P 500 Index is a market index generally considered representative of the stock market as a whole. The index focuses on the large-cap segment of the U.S. equities market. NASDAQ Composite Index is a market value-weighted index that measures all NASDAQ domestic and non-U.S. based common stocks listed on the NASDAQ stock market. Each company's security affects the index in proportion to its market value. Indices are unmanaged, and one cannot invest directly in an index. Past performance is not a guarantee of future results. All investments contain risk and may lose value. Investing in the bond market is subject to certain risks including market, interest rate, issuer, credit and inflation risk. Equities may decline in value due to both real and perceived general market, economic and industry conditions Opinions expressed are those of the author and not necessarily those of Guardian or PAS.
2021-124911 Exp 1/25
Source Bloomberg, EIA (Energy Information Agency), Nasdaq
Jeremy has been in the financial advisory business since 2005 after graduating from Fordham University’s School of Business. He joined Tomoro as a managing partner in 2014. During his tenure, Jeremy has consistently excelled as an advisor in both the personal household and business planning arena. As a managing partner, Jeremy also serves as a mentor to all associates and is hands-on in supporting Tomoro’s growth planning. He has completed various curriculums and certifications, such as New York University’s graduate studies in financial planning, is a Certified Exit Planning professional, and Investment Advisor Representative. He and his family reside in Colts Neck, NJ.
Registered Representative and Financial Advisor of Park Avenue Securities and Financial Representative of Guardian, AR insurance license #8401385 CA insurance license #0F94382
The S&P 500 Index is a market index generally considered representative of the stock market as a whole. The Index focuses on the large-cap segment of the U.S. equities market. The Hang Seng Index (HSI) is a market-capitalization-weighted stock market Index in Hong Kong. It is used to record and monitor daily changes of the largest companies of the Hong Kong stock market and is the main indicator of the overall market performance in Hong Kong.
Indices are unmanaged, and one cannot invest directly in an index. Past performance is not a guarantee of future results. All investments contain risk and may lose value. Investing in the bond market is subject to certain risks including market, interest rate, issuer, credit, and inflation risk. Equities may decline in value due to both real and perceived general market, economic, and industry conditions.
Statistics sources from Central Bank Rates and Bloomberg.